The Analytical Center Looks at the Development of Russia’s Fuel and Energy Sector in 2015

14 june 2016

Crude oil output hit a record high while the output of oil refineries declined, exports were up while natural gas consumption was down, coal output increased to meet rising domestic demand while electricity consumption was down and there was progress in import substitution in the petrochemical sector: Analytical Center experts look at what was going on in the fuel and energy sector of Russia in 2015.

Last year the global economy was slowing down again: global
economic growth was just 3.1% while industrial output fell for the first time
since the 2008-2009 crisis. The high USD exchange rate had a negative impact on
US industry. Another factor that contributed to falling industrial output was
the tough situation in the oil and natural gas production sector. Early 2015
was a period during which the Russian industry literally collapsed; however,
that was followed by a period of relative stabilization. The hardest hit were
the textile industry and mechanical engineering while the food and chemical
industries recorded an increase in output of 2.0% and 6.3% respectively. As the
global economic growth was slowing down the prices for all commodities were
falling but it was once again energy prices that fell the most: by late 2015
the IMF index of energy prices lost 39% on late 2014. Coal was losing value at
the slowest rate, getting just 15-30% cheaper.

Russia’s fuel and energy sector was subject to a whole host
of constraints in 2015: the economy was contracting, Russia was under financial
and technology sanctions, the prices of energy resources were low and volatile.
However, rising demand for Russian oil and natural gas on the global markets
helped the domestic fuel and energy companies cope a little better with their
challenges as did the significant devaluation of the ruble which allowed oil
and gas revenue to remain stable. These factors helped Russian fuel and energy
companies to avoid negative trends and demonstrate solid performance on all key
production indicators, the experts believe.

The experts note a significant increase in oil exports as
well as an increase in its output while the output of petroleum products
declined. “The big tax maneuver” in the oil industry in 2015 encouraged oil
companies to cut the production and exports of fuel oil and focus instead on
exporting crude oil. In 2015 the output of oil and gas condensate was up by 8.2
million tons (+1.6%) on the previous year. Thus, production of liquid
hydrocarbons in Russia has been rising without interruptions since 2009 (by an
average of 1.3% a year). Nevertheless, the growth rate is declining as Russia’s
gradually hitting a plateau in its oil output and as the share of
hard-to-extract oil in total output increases. According to data of the Central
Control Directorate of the Fuel and Energy Sector, 3 out of Russia’s 7 largest
oil companies cut back production: Rosneft by 1.7 million tons, RussNeft by 1.2
million tons and Lukoil by 0.9 million tons. The other companies expanded oil
output, with Bashneft recording the largest increase of output at extra 2.0
million tons.

In the natural gas industry, the trend towards lower
domestic consumption of natural gas in the country continued, primarily as a
result of falling demand among energy companies. In 2015 Russia produced 633.4
billion cubic meters of natural gas and associated gas, which was 0.9% less
than in 2014. Production fell somewhat as exports increased while domestic
consumption declined (by 3.1% on 2014). Consumption fell the most in the
electricity and heat production sector. Exports of natural gas increased in
2015, primarily to customers outside the CIS while deliveries to Ukraine fell
sharply, the experts note.

The review notes a worsening situation in the global coal
market, seeing how the global coal prices fell as a result of stagnation in
consumption on key markets and intensifying competition between exporters.
Investments in Russia’s coal sector, which went mostly into mineral coal
production (up to 95%) in 2015, were down again (falling by almost 45% between
2012 and 2015), falling to RUB 70.1 billion. The financial constraints
continued to put pressure on the implementation of investment programs by
Russian coal companies.

The petrochemical sector significantly expanded the output
of high capacity polymers, for which Russia is a net exporter. The experts note
a trend towards import substitution in the Russian petrochemical industry: in
2015 Russia continued to reduce imports of high capacity polymers while
expanding their output and exports (except for polyethylene and polystyrene).
At the same time dependence on imports remains high for a number of items.

The expert note falling consumption of electricity, saying
that this has most likely been a result of falling industrial output in Russia.
Production and consumption of electricity in the country most closely matches
the basic trends in the economy, the analysts believe.